Concellation of Debt and Long Term Home Buyer Credit

[BulldogTom]

Client asked me this question about her son and I don't have a good answer. Son walked away from home (principle residence). In the same year went and bought another home (what banker let him do that - but that is not the question). Assuming all the rules for cancellation of debt on a qualified residence, and assuming all the rules are met for long term home buyers credit, can the taxpayer get tax relief on the COD and get the $6500 homebuyer credit? On the same return?

Tom

Lodi, CA

[Pacun]

It seems that the IRS doesn't care what happened to the previous house, so I think he could qualify. Anyways, when the bank reposes a house it is considered a sale in the eyes of the IRS. I think the 1099-C reporting the cancelation of debt will be issued for tax year 2010.

[BulldogTom]

I have looked through some material and I cannot find anything that correlates the two items. They don't seem to refer to each other. The only issue would be if there was COD that was not excluded and pushed the MAGI over the threaholds.

Anyone else have an idea? Don't know why this situation is not sitting well with me. For some reason it seems that this situation is not the intent of the laws, but maybe it is.

Tom

Lodi, CA

[Tax Prep by Deb]

Anyone else have an idea? Don't know why this situation is not sitting well with me. For some reason it seems that this situation is not the intent of the laws, but maybe it is.

Tom

Lodi, CA

Something else to consider would be the timing of everything. I have clients who went out and purchased a second home (lesser value of course) then went into default on the previous residence. One client stayed in the old residence until they were told to vacate then moved into the new residence. Another client moved into their new residence and then allowed the foreclosure to occur on the old. For the one that was living in the old residence at the time of the foreclosure I can definitely see the COD being excluded, however what about the client who had already moved into their new residence?

Also, California is not going along with COD being excluded from primary residences this year, which means if you can't show insolvency, there could be serious tax consequences for the state return.

Deb!

[jainen]

>>can the taxpayer get tax relief on the COD and get the $6500 homebuyer credit? On the same return?<<

Ain't America great!

[RoyDaleOne]

The rule of contract law is being subverted by the government.

[kcjenkins]

Seems weird, but to be excluded, it might work. Depends on the timing. For the COD to be excluded, it must have been his residence at the time of the repo, as I read it. But if it was, and he only bought the new house after that, then strange as it seems, it should work.